QE Is So Out

A few weeks ago, US equity markets were experience turbulence on news that the Fed was inclined to “taper” the pace of Quantitative Easing, the program whereby the Fed buys bonds in order to make monetary policy looser.

But the freakout didn’t last long, when it became clear that the Fed wasn’t really in a rush to tighten. Instead it became clear (especially after Bernanke spoke last week) that while the Fed was eager to reduce QE, it had zero interest in increasing interest rates, and if anything it might go longer on zero rates than people were thinking.

In otherwords, the Fed is leaning less on asset purchases, and more on guidance, and other promises to keep rates very low.

There are various reason for why this might be: The Fed could be concerned that QE helps contribute to a shortage of safe assets in the market. Or it might be worried about the swollen size of the Fed’s balance sheet, and the challenges associated with winding it down. Or maybe the Fed doesn’t really think asset purchases accomplish anything.

Whatever the reason is, it doesn’t seem unique to the Federal Reserve.

The Bank of England just came out with minutes of its last monetary policy meeting (the first one with new chief Mark Carney), and it too gave the same indication, that it wasn’t eager to do more QE, and that instead it would likely rely on other measures, such as guidance.

An expansion of the asset purchase programme remained one means of injecting stimulus, but the Committee would be investigating other options during the month, and it was therefore sensible not to initiate an expansion at this meeting. Given the already large size of the asset purchase programme, there was merit in pursuing a mixed strategy with regards to the different policy instruments at the Committee’s disposal. The Committee’s August response to the requirement in its remit to assess the merits of forward guidance and intermediate thresholds would shed light on both the quantum of additional stimulus required and the form it should take.

We already know that at the meeting (which took place on July 4) the Bank of England explored the policy of using more forward guidance, the way the Federal Reserve has for some time.